First sustainable loan in LatAm shows region's commitment to ESG

Author: John Crabb | Published: 2 Aug 2019

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The first sustainability-linked loan agreement in Latin
America closed this month, reinforcing the region's continued
display of commitment to environmental, social and corporate
governance (ESG) development.

The $1.1 billion revolving credit agreement from real estate
company Fibra Uno is the first in Latin America to use the
sustainability-linked loan principles recently released by the
Loan Syndications and Trading Association (LSTA), together with
the Loan Market Association (LMA) and the Asia-Pacific Loan
Market Association (APLMA). The transaction is also the first
sustainable deal by a real estate entity in the region.

The move comes hot on the heels of the extended green loan
principles, which the three agencies updated in December.

Sources suggest that in the early stages of the lifecycle of
these two frameworks there is real interest in Latin America in
these types of financings, although this is the first actual
loan to use one of them.

"While it has been slow there is interest. Perhaps some of
the Latin American borrowers would like to use this opportunity
to show their strength in corporate governance and
sustainability, and prove they are good actors," said one
source close to the issue.

"It is a positive step for
the market"

Tess Virmani, associate general counsel & senior vice
president, public policy at LSTA, added that it is going to be
interesting to see how this will develop in the institutional
markets. "It is a great trend to see that the loan market is
embracing these new sustainable products and that there are now
loan products to support growing appetite for sustainability,"
she said.

The first sustainably-linked loan agreement in
Latin America closed this month;

It reinforces the region's continued display of
commitment to ESG development;

The loan is the first in Latin America to use the
'Sustainability-Linked Loan Principles' recently released by
the LSTA, LMA and the APLMA;

The principles provide that the interest rate in
the loan can go up or down based on targets that are
established by the company and an independent monitoring
company.

Meeting targets

The sustainability-linked loan principles provide that the
interest rate in the loan can go up or down based on targets
established by the company, together with an independent
monitoring company. In this case the target was the electricity
consumed by Fibra Uno, the largest real estate company in Latin
America.

"The target is to achieve a reduced interest rate while
working to improve the environment at the same time," said
Mike Fitzgerald, partner at Paul Hastings who represented
BBVA, which acted as sole sustainability agent, joint
bookrunner and lead arranger in the deal. "Attached to the
credit agreement is a list of environmental objectives, and
progress on those targets is independently audited each year.
If the targets are met, the interest rate goes down. If not,
the rate increases."

The benefit of this is that in Latin America, and also in
the US to a great extent, there is a huge interest in
climate-related disclosure.

"If the targets are met, the
interest rate goes down. If not, the rate
increases"

Companies traded on the NYSE, for example, are required to
update taskforces with climate-related financial disclosures in
order to participate in Carbon Disclosure Project (CDP). As a
result, there is a huge emphasis on monitoring carbon-related
disclosure for companies that are traded on stock exchanges in
the US.

Latin America doesn't have this formal process, so these new
principles are a way of policing electricity usage as equated
to carbon emissions. Relatively speaking, the less electricity
a company uses, the less carbon it is emitting.

"These types of loans are a way of policing carbon emissions
for those companies that are not traded in the US, especially
in Latin America," said Fitzgerald. "The concept of public
reporting of environmental standards, such as CO2 emissions,
has not quite caught on for companies with only domestic Latin
American listings."

A sustainability-linked loan is a corporate loan that has a
pricing component tied to the borrower's achievement of certain
predetermined sustainability performance targets. When compared
to green loans, they are typically less project
finance-orientated. "If only green loans were an option, then
it may be harder to see sustainable finance grow in the loan
market because not much of the market finances projects.
Sustainability-linked loans allow for a broader swathe of the
market to participate," said Virmani.

From a borrower's perspective there are multiple advantages.
One is external messaging: if a borrower has developed a policy
of commitment to sustainability or is starting to factor this
in and take account of where it can improve, this type of
financing is a great way of communicating that. There is a lot
of public value to the borrowers in doing this.

As investors become more focused on ESG generally, these
principles can communicate to the lender investor community a
very welcome level of commitment.

For some borrowers, abiding to the principles could be a
plan they had already set out for themselves, so, this could
also be a way to get a slight pricing benefit. "The discount in
pricing has not been large in most deals, but it is still an
incentive," said Virmani.